Last week, I mentioned inflation being the underlying force behind mortgage rate increases. Last Fri’s Consumer Price Index release and a review of inflation expectations seem to confirm that.

The CPI ticked 0.1% higher in Dec, which matched expectations. That allowed the headline year-over-year rate to fall from 2.2% to 2.1%. However, the core rate, which strips out the volatile food and energy components, rose 0.3%, which was higher than expected, making the year-over-year increase 1.8%. This uptick in the core rate was unsettling and sparked a bit of bond selling, which pushed rates higher.

Inflation expectations, on the other hand, have remained well above 2% for quite a while even though actual inflation has rarely reached that level. Investors haven’t been accounting for those expectations until very recently as is reflected in inflation-adjusted bond prices.

I suspect the change in attitude is due to a number of factors. Markets aren’t sure what to expect from the incoming Fed chair. Will he wait to see whether the tax cuts accelerate the economy, or will he raise rates more aggressively to try to keep a lid on things? Certainly the tax cuts have raised consumer and investor sentiment, which suggests increased economic activity. In addition, oil prices have been a tear of late. Higher oil prices sparking higher overall inflation wouldn’t be a first.

While I’m not convinced we’ve seen the end of historically low mortgage rates, I do think we’re going to experience a period when the forces pushing rates up exceed those pushing down absent some unexpected event. For now, locking if rates dip for a day or two just makes sense.